Exclusive: Microsoft Has Acquisition Deal With Nvidia

Redmond's purchase option automatically kicks in if a third-party offers $3.4 billion or more for tablet chipmaker's shares.

Microsoft and Nvidia have an agreement in place that spells out terms relating to a possible acquisition of the graphics and mobile processor manufacturer, regulatory documents indicate.

The deal gives Microsoft the exclusive right to match any offer for 30% or more of Nvidia's outstanding shares by a third-party, according to an SEC filing reviewed by InformationWeek.

"Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock," Nvidia said in the filing, dated May 27.

The pact puts Redmond in a position to effectively veto attempts by any of its rivals to snap up Nvidia, which makes key components for the red-hot tablet market.

Nvidia's ARM-based Tegra chip is widely used by a number of major mobile device manufacturers. It's employed in Google Android-based tablets and smartphones from Samsung, Motorola, and others. Microsoft itself earlier this week demonstrated Windows 8 tablets running on the new, quad-core "Kal-El" version of Tegra.

There's also been rumblings over the past couple of years that Apple views Nvidia as a possible takeover target.
Apple's A5 CPU for the iPad 2 uses ARM's system-on-a-chip design, an architecture in which Nvidia has considerable expertise as Tegra also relies on ARM.

Microsoft and Nvidia negotiated their acquisition deal as part of a broader arrangement under which Microsoft licensed Nvidia graphics chips for use in the Xbox entertainment and gaming console. The obscure pact is more than a decade old, but is apparently still in effect—even though Nvidia lost the contract to provide GPUs for the Xbox to ATI Technologies in 2003. ATI was later acquired by AMD.

Buried deep within a quarterly earnings report Nvidia filed last week was a warning to investors that a number of factors could derail an acquisition by a third-party. For one, Nvidia's board can issue new shares without stockholder approval. That means it could dilute the percentage available to a would-be acquirer. Also, its strict voting rules would make it difficult for a third-party to mount a hostile acquisition campaign by proxy.

Most notably, Nvidia said any change in control of the company could be delayed or prevented by "our agreement with Microsoft," according to the filing. At current valuations, the clause would kick in if a potential acquirer offered about $3.4 billion for 30% or more of Nvidia.

The deal could be extremely valuable to Microsoft. Any acquisition of Nvidia by a rival could deliver another setback to the software maker's significantly delayed tablet plans. Conversely, if Microsoft took control of Nvidia it could maintain a tighter grip on its supply chain for mobile components.

There are already signs Microsoft is looking to rein in the hardware stack around Windows. Company representatives have reportedly issued specific guidelines to OEMs who want to build tablets and other devices for Windows 8 in order to ensure a uniform experience for end-users and to ease headaches for developers.
An outright buyout of some component suppliers, including Nvidia, could be the next logical step.

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